First-ever ‘perpetual’ bond listed on PSX

KARACHI: With the listing of a ‘perpetual’ bond on the Pakistan Stock Exchange (PSX) on Wednesday, Bank Alfalah has increased its additional tier-1 (ADT1) capital, which will enable it to lend another Rs60 billion in the coming years.

Speaking at the launch of the first-of-its-kind ADT1 Term Finance Certificate (TFC), Bank Alfalah CEO Nauman Ansari said the development marks a new chapter in the history of capital markets in Pakistan. “Capital is the lifeline of a bank and the capital adequacy ratio is a reflection of its strength. This instrument has improved our ADT1 by about 1.5 per cent,” he said, adding that the issue was ‘heavily oversubscribed’.

In regulatory language, bonds are usually referred to as TFCs. These are traded just like stocks on the PSX and offer a regular coupon (interest) instead of dividends.

Bank Alfalah has issued a “rated, listed, unsecured, subordinated, non-cumulative and contingent convertible debt instrument”, simply known as TFC, amounting to Rs7 billion as ADT1. It raised Rs6.3 billion from institutional investors in the pre-IPO placement while ordinary investors contributed the remaining funds as part of the public offering.

However, the abbreviation (TFC) is a misnomer in this particular case because the debt instrument doesn’t have a ‘term’ as such. It’s perpetual, which means it has no maturity date and will keep paying interest at the rate of six-month Karachi Inter-Bank Offer Rate plus 1.5 per cent. Proceeds from the issue will be utilised in the bank’s everyday business operations.

The debt instrument has a mandatory ‘loss absorption feature’. This means TFCs will automatically turn into ordinary shares of Bank Alfalah in case of certain ‘trigger events’ i.e. failure of the bank to adhere to some specific regulatory requirements.

Speaking on the occasion PSX Chairman Muneer Kamal said it is the first debt instrument that has been classified as ADT1 capital by the central bank. “We lack derivative products and the exchange is devoid of any seriously tradable debt instruments,” he said.

According to Arif Habib Corporation Chairman Arif Habib, the PSX is overweight on equities and ‘badly needs’ debt instruments. Presently, all banks need additional capital under the Basel III framework implemented by the State Bank of Pakistan (SBP). “The equity capital is considered expensive. This (debt) instrument provides the way forward,” he said, urging all banks to come up with perpetual bonds to raise ADT1 capital.

Demanding that all such instruments be listed on the PSX, Habib said the move will give investors the opportunity to exit the market whenever they want.

He also demanded that the PSX should declare the TFC a margin eligible security. In simple words, it means the PSX should allow investors to borrow funds from a broker by putting up the TFC as collateral. “It will encourage market participants to take a position in this instrument. It will also encourage other institutions to come out with this type of instrument,” he added.

In his address, CEO PSX Richard Morin asked corporate entities to raise capital through the public debt market. Acknowledging the importance of the benchmark index as a gauge of stock market performance, Morin added that he would rather measure progress by the increase in the number of retail investors, which is currently less than 0.2 per cent of the country’s total population.

“Personally, I’ll assess the success of the PSX in terms of the number of retail investors. I think we need to multiply the retail investor base by at least ten-fold,” he said.

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Kazim Alam
Is a senior financial and economic correspondent at Pakistan Today
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